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Palin Tax Mystery Enters Second Week: Itemizing The Questions

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When news broke last week that Alaska Gov. Sarah Palin received more than $17,000 in state-issued per diems for evenings spent in her own home, several tax experts and watchdogs asked whether John McCain's running mate had ever declared and paid taxes on that money as income. Including travel reimbursements for Palin's family members, the Washington Post reported that the total amount of potentially taxable income totals over $60,000 for Palin's first 18 months as governor.

Plainly seeking to capitalize on the potential story, Barack Obama's campaign quickly issued 10 years of tax records for Joe Biden, daring McCain to do the same with Palin. But as the mystery around those per diems enters its second week, there has been no signal from the McCain campaign as to whether or not it will release Palin's tax returns.

Without those documents, it's impossible to say whether or not she skated taxes on some or all of the per diems and travel reimbursements. But, in addition to the multiple law and tax bloggers who have been all over the story, a tax expert interviewed by the Huffington Post said there are several scenarios under which Palin should have been paying taxes on the money in question. What follows is an itemization, if you will, of the issues at stake -- and what kind of disclosure would put the respective questions to rest.

1) Where is Palin's "tax home"?

This is a central question to the mystery. It would make sense, as some have assumed, that Palin's "tax home" is Juneau, the seat of government in Alaska. Since Palin is granted the use of a state mansion there, her job does not necessarily require transit back and forth to Palin's other home in Wasilla, where she filed for her personal per diems.

As IRS Publication 463 notes:

"If you (and your family) do not live at your tax home (defined earlier), you cannot deduct the cost of traveling between your tax home and your family home. You also cannot deduct the cost of meals and lodging while at your tax home."

Palin did not request per diems for lodging in her own home, but did use them for meals. The only exception here would be if the meals were for official state business.

2) What about those trips for her family members?

According to John Bogdanski, a tax professor at the Lewis and Clark Law School:

It does not appear that such deductions would have been allowable for any amounts attributable to travel by her husband and children. Section 274(m)(3) of the Internal Revenue Code strictly forbids deductions for bringing spouses and dependents along on business travel unless the spouses and dependents (a) are employees of the taxpayer (here, the taxpayer is the governor), (b) are traveling for a bona fide business purpose, and (c) would otherwise be entitled to deduct the travel on their own tax returns. Unless Palin's spouse and kids are also her employees and she can show that they were away on their own businesses, their expenses would not be deductible by the governor. And therefore she cannot exclude from income any per diems attributable to any of them. (By the way, since she's the employee, the income would be required to be reported on her own return, not her kids'.)

Since the bulk of the reimbursement money Palin received from the state of Alaska was for her family, it's easy to see how a mistake on this level could be a big story.

3) The "indefinite" assignment as governor

But it's not certain that Palin is completely in the clear for her own per diems, either. While many state legislators across the country often accept per diem reimbursements for travel to their respective state capitals, their per diems are non-taxable because the length of work is not seasonal and not "indefinite."

Again, from IRS publication 463, which defines an "indefinite" assignment as any that lasts a full year:

"If your assignment is indefinite, you must include in your income any amounts you receive from your employer for living expenses, even if they are called travel allowances and you account to your employer for them."

This would seem to discount an argument made over at The Corner. Guessing from the detail of Palin's receipts that she was reporting them as part of an "accountable" system of reimbursement, they argued that "it seems likely that this is the type of plan the State of Alaska has for its employees. Payments from an accountable plan are in fact reimbursements for expenses incurred and are not taxable."

But not, perhaps, if the work assignment in question is "indefinite." A four-year term as governor with a tax home in Juneau would seem to fit that definition, as far as per diems racked up in Wasilla are concerned.

At minimum, it appears, further disclosure from Palin will be required before these several questions can be settled.